Short-Term Investments

Definition:

Short-Term Investments are financial assets that are expected to be converted into cash or sold within a year. These investments are typically highly liquid and can include marketable securities, treasury bills, and other instruments that can be easily converted into cash.

Examples

Examples of Short-Term Investments include treasury bills, certificates of deposit (CDs) with a maturity of less than one year, commercial paper, and money market funds.

Formula:

There is no specific formula for Short-Term Investments as they are a category of assets rather than a calculated metric.

How to use the metric:

Short-Term Investments are used to assess a company's liquidity and its ability to meet short-term obligations. They are often analyzed as part of a company's current assets on the balance sheet to evaluate financial health and operational efficiency.

Limitations:

The primary limitation of Short-Term Investments is that they typically offer lower returns compared to long-term investments. Additionally, the value of these investments can be affected by market volatility, interest rate changes, and economic conditions.

Applies to:

Short-Term Investments are applicable across various industries, particularly those that require maintaining high liquidity, such as financial services, retail, and manufacturing.

Doesn't apply to:

Industries that are capital-intensive and focus on long-term growth, such as real estate development and heavy manufacturing, may not prioritize short term investments as much because their capital is often tied up in long-term projects.

Summary:

Short-Term Investments are liquid financial assets intended to be converted into cash within a year. They are crucial for assessing a company's liquidity and financial health but generally offer lower returns. While applicable across many industries, they are less emphasized in capital-intensive sectors focused on long-term growth.